The commercial debt collection sector is experiencing the same “good news, bad news” paradigm as the consumer collections market in the current economic environment: the industry is getting more accounts, but those accounts are becoming harder to collect.
As businesses across the country fall behind and default on loans, more companies are turning to third party collection agencies as an aid to recovering past due debt.
The Commercial Collection Agency Association (CCAA), said recently that commercial accounts placed for collections rose to a record $13.5 billion for the year ended Sept. 30, 2008, besting the previous record of $13.15 billion in the same period ended in 2002. For all of calendar year 2008, $14.3 billion in business to business accounts were placed for collections, up 23.2 percent from 2007.
“It’s not too dissimilar to what I see and hear on the consumer side, except that the consumer side and the debt buying side are more problematic in terms of larger declines in the collect-ability of the accounts,” said Executive Director of CCAA Emil Hartleb.
But declines in collectability are being realized in the commercial collections space. According to a survey conducted by CCAA, 80 percent of its members surveyed indicated that they have experienced a decline in the collectability of accounts placed with them for collection. The median decline in collectability reported was approximately 5.6 percent. And the trend is expected to continue, with 90 percent anticipating declines in collect-ability through the first half of 2009.
According to information gathered by business credit bureau Cortera, late payments on commercial loans have increased 30 percent in the last 12 months.
“There are distinct similarities between delinquent accounts and the unemployment rate,” said Cortera President and Chief Executive Officer Jim Swift. Cortera’s data shows a strong correlation between the unemployment rate of a state and the percentage of commercial loans past due in that state.
This is borne out in a recent press release from Cortera that lists the Top 10 best and worst states for past due commercial accounts receivable (“Analysis from Cortera on Commercial Collections Reveals Top 10 States Most and Least Affected by Economic Downturn,” March 3). The states with the lowest percentage of past due commercial receivables – Montana, Vermont, and Wyoming – have low unemployment rates compared to national averages, while the worst states – Nevada, California, and Arizona – are experiencing relatively high unemployment.
But Swift noted that it’s hard to prove which is causing which: are late business payments leading to unemployment, or is high unemployment leading to lower revenues, resulting in late payments?
In comparing February 2008 with February 2009, Bob Ingold — president of Commercial Collectors of New York — told insideARM, “We’ve seen a dramatic increase in volume; both the claims and dollars have gone up remarkably. I would say that our placement dollars went up as much as a 1/3 and our active accounts went up 40 to 50 percent.”
Ingold offers a familiar refrain in the accounts receivable management industry: “I’m collecting the same amount, but it’s taking more money to do it. It’s a harder collection. I’m working harder for the same dollar.”
He notes, however, that collections are actually running ahead of last year. “We haven’t been hit quite as heavy as the consumer side,” he said. “I suspect that the middle to medium size businesses are going to see the pinch of not paying their bills and that is going to end up as collection items probably in the second quarter, and then I’ll see a slow down.”
Ingold predicts that the second and third quarters are going to see a contraction on business. He expects there is going to be more insolvencies and bankruptcies among U.S. businesses. He thinks the next 90 days will be the most severe.
“My feeling is that this is probably going to affect the b2b commercial environment for probably the next 6 to 12 months. And we’re going to start to see a slow increase, collect-ability is going to get better and clients are going to become a little more aware of their credit. We’re just going to start to see it get back to business as usual,” he said.